On January 1, 2024, the federal Corporate Transparency Act (CTA) will take effect. The CTA combats money laundering and other illicit conduct by attempting to thwart the improper use of shell companies, which has the potential to obfuscate the identities of “owners.” The CTA mandates that “reporting companies” register with, and provide certain information to, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
We discussed the CTA earlier this year in our Annual Client Newsletter, but we wanted to remind you how the CTA may affect you now that it will soon take effect. FinCEN has not yet released a final form for reporting companies to report information on FinCEN’s website.
Who must report?
A “reporting company” is any corporation, limited liability company, limited partnership or other entity (1) created by filing a document with the secretary of state or similar office in any U.S. state, territory, or federally recognized Native American Tribe, or (2) formed under the laws of a foreign country and registered to do business in the U.S.
The CTA currently has twenty-three (23) exemptions that relieve certain reporting companies from CTA obligations. Determining whether a reporting company is exempt is an ongoing consideration. Exempt organizations include certain large companies (gross receipts of greater than $5 million reported on the previous year’s tax return, greater than 20 full-time U.S. employees, and operate at a physical office in the U.S.) and certain tax-exempt organizations. If a reporting company either loses or gains exemption status, then that change must be reported within 30 days.
What must be reported?
The CTA requires a reporting company to report information about the company, its “beneficial owners,” and its “company applicants.”
Each reporting company must disclose the following information:
- Entity name, including any trade names or “doing business as” names
- For a U.S. entity, street address of principal place of business; or for a foreign entity, street address of primary location in U.S. where business is conducted
- Jurisdiction of formation
- Taxpayer Identification Number (TIN) or an Employer Identification Number (EIN).
Reporting companies must also provide the following information for any beneficial owner and company applicant:
(1) Individual’s full legal name
(2) Birthdate
(3) Residence street address (or business street address for company applicant)
(4) Unique identifying number and issuing jurisdiction from an acceptable identification document and image of such document (such as a driver’s license).
In lieu of providing the above information to the reporting company, an individual may supply this information to FinCEN directly and obtain a FinCEN identifier. The individual would then report only the FinCEN identifier to the reporting company. This is useful for privacy as well as simplification where any individual would otherwise have to provide this information to multiple organizations.
Who is a beneficial owner?
A beneficial owner is “any individual who, directly or indirectly, either (1) exercises substantial control over such reporting company; or (2) owns or controls at least 25 percent of the ownership interests of such reporting company.” When determining the 25 percent ownership threshold, all options or similar interests are treated as exercised. Individuals who can exercise “substantial control” include senior officers; individuals with authority over the appointment or removal of senior officers or a majority of the board; and individuals who have “substantial influence over important decisions” or those who have any other form of substantial control over the reporting company. These broad categories may implicate third parties. There are some, limited exceptions to a beneficial owner such as minor children or individuals whose only interest is a future interest. However, for minor children, the information of the minor’s parent or other responsible party would need to be reported. Note that age of majority is determined according to the law of the state of the reporting company.
What is a company applicant?
A company applicant is (1) the individual who files the document creating the reporting company, or for foreign entities, the document to register to do business in the U.S.; and (2) if applicable, the individual primarily responsible for directing or controlling the filing of the relevant document by another. At least one company applicant must be identified, but no more than two are needed if applicable. If a business formation service is used, then this information would need to be obtained from such service.
If a reporting company was created before January 1, 2024, then its company applicant(s) need not be identified or reported.
When must this information be reported?
A reporting company created or registered before January 1, 2024 will have until January 1, 2025 to file its report.
A reporting company created during 2024 will have 90 calendar days after creation or registration to file its report. A reporting company created in 2025 or thereafter will have 30 calendar days after creation or registration to file its report.
If a reporting company needs to update, amend, or correct information, then it has 30 days from when the change occurred or when it becomes aware of the error or inaccuracy.
Information will be reported electronically through a secure filing system via FinCEN’s website. FinCEN will provide further details on its beneficial ownership information webpage prior to the due date. There will be no fee due.
What are the penalties for noncompliance?
Willful failure to report information or supplying false information to FinCEN (or willful failure of an individual to report information or supplying false information to the reporting company) may be subject to civil and/or criminal penalties of $500 for each day that the violation continues (up to $10,000), and criminal penalties of up to two years of imprisonment and fines up to $10,000.
Who may access this information?
This information may be accessed by certain federal agencies (including for tax administration purposes), certain foreign agencies, state, local and tribal law enforcement agencies for certain purposes, and financial institutions (subject to appropriate controls and protocols). The information will not be available to the public and is not subject to requests pursuant to the Freedom of Information Act. There are penalties imposed for misuse of this information.
How should businesses prepare?
Businesses should determine if they qualify as a reporting company. If so, they should then determine who are their beneficial owners. Once that is accomplished, they should compile the necessary information identified above. For many businesses, it will be easy to determine which individuals need to provide information. For other businesses with more complex structures, it may be necessary to seek professional assistance.
FinCEN recently issued a Small Entity Compliance Guide and FAQs on Beneficial Ownership Reporting, available on its website.
As the impending deadlines approach, it is important to understand how the CTA and its reporting requirements will affect your business. For more information, please contact Thomas B. Noonan or another BW attorney.